Super funds enjoy positive quarter

Super returns have been dismal for the past two years as part of the fallout of the global financial crisis. With most recording double digit losses but there may be a bright spot for the first time since 2007. Super funds have had a positive quarter with the average fund gaining just over five per cent in the three months to June thanks to the recent market rebound. Shane Oliver from AMP discusses the results with Ali Moore.

Transcript

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ALI MOORE, PRESENTER: When you open your mail over the next few weeks and there's the annual statement from your superannuation fund, you probably already know what to expect. With the global financial crisis and the big falls on share markets, super returns have been dismal for the past two years, with most recording double-digit losses.

But there may be a bright spot. For the first time since 2007, super funds have had a positive quarter, with the average fund gaining just over 5 per cent in the three months to June thanks to the recent market rebound.

So is that cause for celebration? For his thoughts I was joined earlier in the studio by AMP Capital's Shane Oliver.

Shane Oliver, the year to June was a horror year for super funds - funds like your own, losing something like 17 per cent. But now it seems most funds had their first profitable quarter since 2007. One swallow doesn't make a summer, but can we take heart from this?

SHANE OLIVER, AMP CAPITAL: I think we can take heart from the improvement in funds over the last three months or so. Share markets seemed to have bottomed back in March and we've had gains, and they've been quite broad-based. Global shares picked up quite substantially. There's signs of improvement regarding the global economy. The Australian economy is looking stronger and at the same time of course, after the huge falls of the last few years, share markets are starting from a pretty cheap level. And given that share markets to a large degree underpin superannuation funds, as share markets continue to improve, which I think they will as the recovery is factored in, I think we'll see further gains in superannuation fund returns.

ALI MOORE: That said, the market actually rallied more than 11 per cent in that quarter, but the average fund went up around 5 per cent. Why the big difference, given the dependency?

SHANE OLIVER: There's a couple of things affecting the average fund. One is, funds at any point in time will have exposure to cash and bonds, so just like the share market fell 55 per cent from top to bottom, the average fund didn't fall anywhere near that amount because of the stabilising influence of cash and bonds.

There's also a number of superannuation funds, in fact quite a lot, with exposure to unlisted assets, whereas financial assets like shares, credit markets, listed property trusts, led on the way down - they are now leading on the way up.

In the meantime unlisted assets, like directly held property and infrastructure, they're still catching up to the earlier falls in share markets, acting as a drag on superannuation funds.

ALI MOORE: Over the year, while everyone had a dreadful year, relatively speaking the industry funds performed better than most. Was that more than simply fee structure? Was that more about listed versus unlisted investments?

SHANE OLIVER: There's a range of issues involved in the difference between the returns from the retail funds and the industry funds. A big driver, of course, has been the relatively high exposure of industry funds to the unlisted assets. Like directly held property, or directly held infrastructure, tend to be a lot more stable - they don't tend to move up and down as much the share market but they also lag a little bit. And as for example listed property trusts fell heavily, starting in 2007 with the problems that Centro had, unlisted property values kept going up. It's only in the second half of last year direct property values started to come down.

That relative stability offered by the unlisted assets meant that the industry funds have tended to come down less over the last 12 month, than the retail trusts have come down by and it largely reflects that difference in exposures.

Going forward it's possible the relationship will turn around. We are seeing the share markets pick up and likewise listed property trusts, whereabouts the unlisted assets are falling in value - you may see a swap over in 12 months.

ALI MOORE: We didn't see that in the quarter. The industry funds shared in this gain for the March quarter.

SHANE OLIVER: They certainly shared in the gain, but I think they didn't do quite as well as some of the superannuation funds which are solely exposed to financial assets. I think going forward, as we see further write downs, possibly further unlisted property write downs, it will act as a drag on funds which have a relatively high exposure to unlisted property and infrastructure.

ALI MOORE: Even though the average fund rose something like 5.5 per cent in the June quarter, you would be better off would you not simply putting your money - well, not so much cash - but into corporate or government bonds?

SHANE OLIVER: There's no doubt that over the last 12 months - in fact over the last two years - an investor would have been much better off in cash. The unfortunate reality, though, is that every so often superannuation funds, given their exposure to shares and growth assets, will have negative returns. And the history of superannuation funds, if you go back over the last 20 or 30 years, is that we get negative returns once every six years or so. If you try to back cast it way back to the 1930s, you'd find the same sort of thing.

What we have seen is unusual in the sense we have had two negative years in a row, but negative returns in a broader sense are not that unusual - they are quite common. Over time, if you look at the returns, you do find that having exposure to growth assets like shares provides a higher return than you would get if you just had cash or bonds. If you go way back to the 1930s, the average return over that long period has been about, say, 5 per cent from cash, 6 or 7 per cent from bonds, but shares have delivered about 11 to 12 per cent per annum. So a superannuation fund with a higher exposure than shares will provide you a higher return over the long term. But yes, we'll go through periods like the last couple of years where cash has been a better bet.

ALI MOORE: You go back to the 1930s but you have done other modelling taking you back to 1901, and you found the average return in all that time up to 2007 was 5.5 per cent plus inflation. Is that pretty much what the average superannuation investor can expect? Have we seen anomalies with the big gains in, you know, the late '90, early 2000. Is 5.5 per cent plus inflation about it?

SHANE OLIVER: I think 5.5 per cent plus inflation is what investors should be expecting. We saw some very strong returns from superannuation funds through the '80s, '90s, and more recently. In fact, for the four years to 2007 superannuation returns after inflation were typically pushing up around 12 per cent, which was exceptionally high and unsustainable in a world where economic growth is typically around 3 per cent and inflation maybe 2.5 per cent. So a long-term sustainable return should be around the inflation rate plus about 5, 5.5 per cent.

ALI MOORE: Given the outlook, the uncertainty, many people have cut their voluntary contributions, is now the time to rethink that?

SHANE OLIVER: For most people the tax concessions are still extremely attractive - it's only higher income earners that they are wound back. I think the best way to think about superannuation is the same as the way someone is thinking about shares. If they have the flexibility to make higher contributions, then now is the time to do it. Because they would be buying into superannuation funds at a time when the levels are quite low and as share markets pick up, they'll participate in that. Obviously the worst time to increase contributions is when you have had a run of very strong and high returns. But now I think is a good time to increase allocations towards shares or if people like, to superannuation funds and to pick up - to take advantage of the recovery coming through.